The Week in Public Finance: Alaska Downgraded, Low Income-Tax Revenues and Congress Meddles in Online Sales Taxes Again

A roundup of money (and other) news governments can use.

Alaska Downgraded Again and Again

Just weeks after it passed yet another budget that relied on rainy day savings, Alaska was downgraded by two credit ratings agencies.

First came Moody’s Investors Service, which downgraded Alaska to Aa3, citing the state's continued inability to address structural fiscal challenges and come up with a complete fiscal plan. Just days later, S&P Global Ratings dropped its rating to AA. Like Moody’s, S&P chastised Alaska lawmakers: A reliance on reserves, S&P analyst Timothy Little said, “coupled with the state's economic contraction since 2012 and the fallout of oil prices in mid-2015, have reached an [unsustainable] level."

The Takeaway:The downgrades, while not good news, should come as no surprise. Last month, S&P outright warned officials that it would downgrade the state if the governor and legislature failed to pass a sustainable budget that fully addressed its massive decline in oil revenues.

Now, Alaska has punted its budget problems into the next fiscal year. But in six months, when lawmakers reconvene to draft the fiscal 2019 budget, they can't lean on rainy day fund to fix the problem. There is no longer enough money in the account to cover the next projected budget shortfall. We’ve seen what happens when state leaders back themselves into a corner. Illinois, anyone? Let's hope it won't take Alaska two years to fix their budget mess.

What's Causing Lower Income Tax Revenue?

Total state income tax revenue was down 4 percent in April compared to the previous year, a new report from the Nelson A. Rockefeller Institute of Government has found. Of the 41 states with broad-based income taxes, 24 experienced declines. Regionally, states in the Great Lakes and the Rocky Mountains fared the best, with modest income tax revenue increases.Meanwhile, tax declines were largest in the New England and Mid-Atlantic states.

Although many states had forecasted declines in April and May, they were worse than expected. On average, the institute reports, states during those months collected 6.4 percent less in income tax revenue than anticipated.

The Takeaway:The big unknown here is why the tax returns are lagging this year. The report’s authors, Donald Boyd and Lucy Dadayan, pose two possibilities.

The first: "The Trump Effect" caused people to shift income out of 2016 in anticipation that President Trump would lower income tax rates in 2017. “If this is the case,” Boyd and Dadayan write, "state income tax revenue would grow more strongly next year.”

The second possibility is that the economy is getting weaker. Over the past year, the Rockefeller data show that withholding income taxes has grown slower than is typical. That could mean that wages are not as high as economic data suggest.

Congress Meddles in State Attempts to Tax Online Sales -- Again

In the coming week, a Congressional subcommittee will hold a hearing on the No Regulation Without Representation Act of 2017, a bill aimed at stopping states from taxing online purchases. The bill comes as states over the past year have launched a coordinated effort for the right to tax all online purchases made by their residents, regardless of where the seller is located. The motivation? Capturing new revenue in an economy where revenue growth has been frustratingly slow. By some estimates, states are collectively missing out on more than $23 billion annually in potential online sales tax revenue.

South Dakota has led the way with legislation that is now held up in a lawsuit brought by catalogand other online retail interests. The suit is pending before the State Supreme Court and is expected to ultimately be decided by theU.S. Supreme Court. If the ruling finds in South Dakota’s favor, it would overturn a 1992 decision that said only companies with a physical presence in the state are required to remit sales taxes.

The announcement of the July 25 hearing on House bill H.R. 2887 drew immediate support from the catalog industry. American Catalog Mailers Association President Hamilton Davison issued a statement accusing “rogue states” of targeting “out-of-state businesses to comply with onerous tax collection regimes that ran afoul to Supreme Court precedent."

The Takeaway:The main reason South Dakota decided to entice a legal challenge with its online sales tax law is because for the past decade, Congress has refused to decide on the policy itself.

What’s even more frustrating for state and local lawmakers is this issue seems to be a partisan one at the federal level. But it’s a bipartisan issue for everyone else. In 2013, both red and blue states’ hopes were buoyed when the then-majority Democratic U.S. Senate passed the Marketplace Fairness Act, which allowed states to collect sales tax on all online purchases by their residents. But the bill died in a Republican-controlled House committee, which refused to hold a hearing on it. (The sponsor of this year’s No Regulation Without Representation Act is a Republican.)